StudentShare
Contact Us
Sign In / Sign Up for FREE
Search
Go to advanced search...
Free

Ethics and Financial Crisis of 2008 - Essay Example

Cite this document
Summary
The paper "Ethics and Financial Crisis of 2008" discusses that too big to fail is a term that is used to describe the conditions of the US financial system prior to these crises. Many banks did not assume the moral hazards of their risky investments. …
Download full paper File format: .doc, available for editing
GRAB THE BEST PAPER94.4% of users find it useful
Ethics and Financial Crisis of 2008
Read Text Preview

Extract of sample "Ethics and Financial Crisis of 2008"

?Running Header: Financial Crises of 2008 “2008 Financial Crises’ Module The 2008 Financial crisis were one of the toughest economic crises faced by the big economy of United States of America. These crises were not natural and were not part of the economic cycle, but many experts state that these crises were a result of some of the most unethical financial practices that were common in the United States of America’s economy. The banks used new instruments which were not only risky, but were unethical also. These instruments were created to double the debt level in the US economy which was already indebted heavily. This created a bubble and when the debt levels went out of control, the bubble busted resulting in dire economic problems. The instruments used to create debt in the economy were subprime mortgages. These mortgages were given to people who do not have collateral for their borrowing and were given without banks assessing their sources of income. They were given on the basis of credit score. Hence, in case these people go bankrupt, banks had no avenue to recover their investments. Since, the Financial System in the USA is not independent this created a “domino effect” situation. When the largest investment bank in the universe Lehmann Brothers collapsed, many other institutions in the US started feeling the pressure. Many had to write off their investments in Lehmann Brothers and they started to crumble. In order to assess why this happened, a study of risky and unethical instruments that were prevalent in the US Financial System at that time is needed. (NY, 2009) Credit Default Swaps are one of the most risky instruments that were common in the United States of America’s financial system prior to the 2008 financial crises. This instrument was used by lending companies to hedge their investment against credit risk. If one party need loan, the lender usually asked an insurance company to hedge their loan in the case of credit event against a periodic fee. This looked really bright and it was considered that it was going to increase the level of investments in the economy. For example, if A needs a loan and have a credit rating of B+. B lends loans and lends only to companies with a credit rating of AAA. The third party C with a credit rating of AAA will tell B that it will insure A against a periodic payment. Suppose A agrees and lend $2 Billion to A. It is also important to assume that insurance companies have limited assets. Suppose C has assets worth $3 Billion. It can be assumed that in case of bankruptcy of A, B can recover his investment through C. This looked fine, but what started happening was that companies like started insuring the loans that were as big as 10 times of their assets. Now in case credit event occurs, then they were unable to repay the lender. That was only a speculation that borrowers won’t default on loans. However, if loans that were more than the assets held by C default, then there is no way C can pay A. This would lead to a collapse. Not only A and C will collapse, but A will also go down due to high level of non-performing loans. Similarly, all the debtors of A will also lose their money and domino effect will be created. This is what happened prior to the crises started. The instruments were so risky, that they lead to the fall of the whole Financial System of the United States of America. The reason of failure of these instruments was the high systematic risk that was present in this type of securities. Since, it is impossible to diversify this risk, there was no way that the insurance companies could predict which companies would do well and which would fall down. Since, these instruments could not be diversified it lead a collapse of the whole financial system of the United States of America. (Money Monitoring, 2011). MBS or Mortgage Backed Securities were another fancy term used in the era prior to the 2008 financial crises. Mortgages were given on the premise that the property prices have been rising in the economy. So even if the bank gives unsecured loans against mortgages they will make money out of their lending. This was nothing but a lie. The property prices in the USA were rising because not because of increase in purchasing power of the ordinary man in the United States of America, but they were rising due to unnatural demand being created by these loans. Now when people started to default on their mortgage payments, the banks took their properties and put them on the real estate market. This lead to the increase in supply and the inflated prices come down. As a result banks realized that they have much less in their pockets then what they lent. Many institutions found it very hard write off these losses and had to file for bankruptcy. Similarly, many institutions that were dependent on these banks also had to file for bankruptcy creating a vicious circle of bankruptcy.(EC Pulse, 2011) Collateralized Debt Obligations encourage banks to undertake risky investment. These were later sold to investors at an inflated price. The rate of these investments was usually more than the rate of safe investments like T Bill which were clubbed in Tier-1 investments. The rate increased with each Tier level. These people were the last one to get their return, after all the safe investments had been paid off. This created a difficult situation to banks when they started experiencing a situation where people started to default on their dues. Hence, many investors lost a lot of their money and as a result had to file for bankruptcy. (CFR, 2011) Too big to fail is a term that is used to describe the conditions of the US financial system prior to these crises. Many banks did not assume the moral hazards of their risky investments. In other words, they were too preoccupied with the materialistic side of their investment decision to look at what will happen in the economy if some goes bad. Many experts states that many large institutions take financial and monetary policies from government and are able to take high risk positions because even they fall down, the government and the Federal Reserve is there to help them out. However, “Too big to fail” discourages the financial institutions to make more safe and sound decisions. Many companies and institutions believe that in case something wrong happens, the government and Federal Reserve is there to help them out. In case nothing bad happens they can enjoy the high returns from their risky investment. All of this encouraged some of the most foolish economic and financial decisions that were ever witnessed by the world. The government of the United States of America could not save the institutions that were in the process of bankruptcy and many eventually did fall down resulting in heavy loss for the economy as a whole. (Chanda, 2011) Works Cited Council on Foreign Relations: A Timeline of Global Economic Crisis http://www.cfr.org/publication/18709/ Alfaro L, Chanda A, Kalemli-Ozcan S, and Sayek S,. ‘How Does Foreign Direct Investment Promote Economic Growth? Exploring the Effects of Financial Markets on Linkages’. Site last accessed on September 10, 2010 from http://www.hbs.edu/research/pdf/07-013.pdf EC Pulse. Credit Default Swaps: Is It the Coming Threat? Retrieved on 22 September 2010. http://www.ecpulse.com/en/studies/2010/10/12/credit-default-swaps/ Money Morning. Credit Default Swap Strikes Again. Retrieved on 20 September 2010. http://moneymorning.com/2010/02/26/credit-default-swaps-7 New York Times, Articles written on May 27 2009 http://www.nytimes.com/2009/05/28/business/economy/28econ.html?_r=1&emc=eta Read More
Cite this document
  • APA
  • MLA
  • CHICAGO
(“Ethics and Financial Crisis of 2008 Essay Example | Topics and Well Written Essays - 1250 words”, n.d.)
Retrieved from https://studentshare.org/business/1432706-ethics-financial-crisis-of
(Ethics and Financial Crisis of 2008 Essay Example | Topics and Well Written Essays - 1250 Words)
https://studentshare.org/business/1432706-ethics-financial-crisis-of.
“Ethics and Financial Crisis of 2008 Essay Example | Topics and Well Written Essays - 1250 Words”, n.d. https://studentshare.org/business/1432706-ethics-financial-crisis-of.
  • Cited: 0 times

CHECK THESE SAMPLES OF Ethics and Financial Crisis of 2008

Managing Ethical Consultancy in the UK

To examine this issue, the paper will highlight the UK consulting industry; review unethical practices in the recent financial crisis by auditing firms and mention the contentions put forward by consulting industry, and lastly close the paper with a conclusion.... Example of failure and unethical practices: Financial crises The recent financial crisis brought about a heated debate on modern auditing practice.... In deed, Sikka (2009) points out that during the financial crisis, financial institutions sought for government financial assistance, after getting unqualified audit report....
6 Pages (1500 words) Essay

Business Schools and Responsibility for Preventing Financial Crisis

Business schools and responsibility for preventing financial crisis Business schools are playing an important role in educating students the basics of world economic situations, different business perspectives of the global business, structure and working nature of global business organisations and many more.... Business schools bear a certain responsibility for (not preventing) the current financial crisis.... According to many researchers, including Noble laureate Paul Krugman, these global financial crises are results of poor and ineffective banking and financial system of the developed economies of the world like European economies and mainly American economy....
10 Pages (2500 words) Essay

Business Ethics as a Moral Code of Conduct

In other words, attempting profit out of this year caused the recent financial market failure.... Moral Issues in financial Market Failures Banking failure is defined as a situation in which banks are closed from operation because of the financial difficulties (Gunsel, 2007).... The paper "Business ethics as a Moral Code of Conduct" states that the new business dimension involves economic aspects such as creating jobs to the labor force, contributing to the tax revenue of the government and supporting the wellbeing of the disadvantaged groups in the society....
9 Pages (2250 words) Case Study

Ethics and Corporate Governance: Lehman Brothers

reported that Lehman Brothers' action of writing up the value of KSK Energy Ventura (a power plant in India) from $400m to $600m during the 1st Quarter of 2008, was an unethical accounting practice, according to Corkery (2008)....    2008    Matthew Lee, the Lehman's Holding Incorporated Senior Vice President, was discontent with the accounting practices of the company, and wrote a letter (later made public) to the company; expressing concerns about the senior managers were violating the internal code of ethics, by misleading investors and regulators about the true value of the company assets, according to Corkery (2008)....
12 Pages (3000 words) Essay

Literature review corrections/CSR case study

The literature review concludes with a review some of the very latest research on CSR specifically as it relates to the current financial crisis which has caused on-going severe hardship for companies and individuals in Greece as well as in other countries of the world.... This literature review asks the question “what is CSR?...
21 Pages (5250 words) Essay

Financial Crisis 2007-2010

n a report published by the World Bank in 2009, it is noted that the origins of the global financial crisis of 2007-2009 can be identified in 'the economic growth of the years 2003-2007' (World Bank, 2009, p.... the crisis of 2007-2009 is considered to have its roots in the economic decisions of the pre-crisis period, a claim which leads to the assumption that the crisis was unavoidable.... This essay "financial crisis 2007-2010" explores the origins and provide background information about the recent financial crisis....
7 Pages (1750 words) Article

The Role of Accounting in Serving Public Interest Versus Self-interest

I will state the answer to the above question is in the negative in relation to the financial crisis brought about by the bursting of the real estate asset price bubble and the issue of stock buybacks within the context of academic research.... he accounting profession adopted a code of ethics and professional conduct for its members to guide them in serving the public interest.... The foundation principle of public interest is contained in this code of ethics and yet only 62% of accountants in a survey were able to identify correctly that a formal definition of public interest can be found in their code of ethics....
6 Pages (1500 words) Coursework

The Financial Crisis 2008 and the Legislation in Response to this Crisis

The crisis was triggered by the financial crisis of the US housing market before spending on the rest of the world.... In the course of this paper, the author looks into the financial crisis, the legislation that is in place in response to this crisis and two films that seek to reveal more about this topic in question.... nbsp; It is said that every reaction causes an equal and opposite reaction, and the same can be said of the financial crisis in the United States in the year 2008 which is known to be the greatest financial crisis after the Great Depression of 1930 (Marshall, 10)....
11 Pages (2750 words) Term Paper
sponsored ads
We use cookies to create the best experience for you. Keep on browsing if you are OK with that, or find out how to manage cookies.
Contact Us